Inner ring real estate makes the rich richer

To create wealth through property investment its important to buy the type of property that outperforms the average with regards to capital growth.

That’s why I have always advocating buying in the inner and middle ring suburbs of our capital cities, where there is a lack of developable land and constant demand from tenants and buyers. This is a sure recipe for long term capital growth.

Now, new data from SQM Research published on domain.com.au, has revealed some interesting insights into the difference between capital gains in the inner, middle and outer suburban property markets of our major capital cities.

SQM Research led by Louis Christopher, has compiled transactional data over 20 years for Sydney’s inner, middle and outer ring areas that illustrates the inner ring of the harbour city has indeed enjoyed higher capital gains than its middle and outer counterparts.

The inner ring had a compounded growth rate of 8.4% per annum during the two decades, while the middle and outer rings recorded capital growth of 7.7% and 7.4% respectively. This trend is also reflected in data for the past five years, which reveals annual growth of 5.7% for the inner ring, 5.2% for the middle and 3% for Sydney’s outer ring.

However Christopher says that the middle ring of Sydney has actually outperformed the inner ring since December 2008, with an annual growth rate of 13.6%, compared to 10.2% for the inner ring and 7.6% for the outer suburbs. He says this indicates a narrowing of performance for these areas, with the middle ring starting to play a bit of catch up to its inner suburban neighbours.

“The reality is that the best 1,000 homes will generally go to the top 1,000 most wealthy individuals or families, presuming all of them are interested in buying these homes. The next best 1,000 homes go to the next wealthy 1,000 and so on. As the population increases, so does the population of the wealthy,” explains Christopher.

He says that as competition for the best real estate intensifies, pushing up prices in the process, even the rich are forced to compromise and look for the next best piece of real estate so to speak. This is what generates that ripple effect we see, when more affordable suburbs next door to more affluent suburbs start to see values rise as people are pushed out of the pricier neighbourhood.

Christopher calls this the “wealth effect, spreading across Sydney suburbs that were once the land for middle income earners.”

He adds, “There is also the factor of the rich getting richer. If you believe that trend is going to continue, then buying where the rich buy will help.”

Of course the other factor in the investment equation is yields which, particularly in uncertain interest rate environments, can be almost as important to investors as capital gains.

According to the SQM research findings, rents have also grown faster in Sydney’s inner urban areas for the past twenty years, at an average 5.2% per annum. However the outer ring has outperformed over the past five years with a rental increase of 8.9% compounded every year, but Christopher says this type of accelerated growth is occurring largely across the board given the acute shortage of rental accommodation in our major cities.

This confirms that if you want to generate wealth through property by seeking out investments that will consistently outperform the averages over the long term, you simply cannot go past quality, inner suburban real estate that’s close to good infrastructure including public transport. That’s not to say that buying in the middle and outer rings is futile, but it may take a little bit longer to generate the returns you want.

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au

Property investor resources

Guide to getting rich

Invested in property?

PropertyUpdate.com.au is Australia's leading property investment wealth creation website with tips, advice and strategies from leading real estate investment experts. Featuring topics like property investment, property development (helping you understand the process), negative gearing and finance (so you can borrow more from the banks), property tax (allowing you to structure for legal tax deductions and asset protections), negotiation, property management (assisting landlords and tenants understand their right responsibilities), commercial property (for experienced property investment individuals), personal development and the psychology of property investment success.